The Predetermined Death of SunEdison

I will keep the necessary introduction to the company’s activities relatively as short and sweet as possible, but it is hard. This report is mainly meant to help retail investors understand the full story and grave nature of the situation for SunEdison shareholders.

SunEdison ($SUNE) is a company that installs solar panels, and they do it in very high volumes globally. SunEdison, the company, is one of the leading forces driving the implementation of solar panels across the globe. SunEdison, the stock, is exactly the opposite.

SUNE went from all-time highs to multi-year lows in a few months time, bringing the entire solar sector along with it. The company also has public former-subsidiary companies, which is where the story truly becomes interesting.

TerraForm Power ($TERP) is SUNE’s primarily domestic-focused “yield co.” utility, and a second yield co., TerraForm Global ($GLBL), serves the same function but for emerging market assets. These companies are a key part of my thesis, so let’s keep them in mind.

SunEdison was a key participant of inflating (what I believe we will look back upon in the future) the solar bubble [along with companies like SolarCity ($SCTY)], and ultimately was the needle that popped it. I’m a believer that the industry (and stock prices of most companies) will recover in the distant future, so don’t count renewables out. It’s just been a very long time since the market has had many participants try and build a new industry, and I believe investors became over-exuberated.

This is an industry full of smart CFOs and financial engineering. But, SUNE has been the worst offender. SUNE was seen as a “roll-up”; buying tons of decent assets and companies while raising over $11 billion (yes, billion) in debt. This was somehow overlooked, and as the market cap would increase, so would the debt. Every new deal, every new debt raise, the stock went up to almost mirror the financing. Then, SUNE made “one deal too far” and made a deal with Vivint Solar ($VSLR) to buy the company for less than the VSLR IPO price, and that set off a red flag for investors. And, as the stock continued to fall from the peak the day of that announcement, debt still increased as SUNE continued operations.

So now, here we are just a few months later and the company is worth around $1.5B with still no real dent into the debt payments. Along with the rapid decline in stock price, the yield co.’s stock prices have been nearly equally as damaged.

History lesson over.

Now it is time to focus on the daughter company TerraForm Power. Both TERP and SUNE reported their quarters, 11/9/15 and 11/10/15, respectively, and provided details regarding future deals and projects; normal company-type things. The key takeaway from these conference calls & presentations was actually from the TERP call, where it was mentioned that two deals still have to close by the end of 1H16: The purchase of private company Invenergy’s wind power assets, and also the acquisition of Vivint Solar.

The ticking time-bomb for SunEdison

These two acquisitions are key in turning Terraform Power into an even more diverse renewable utility with the addition of more wind turbines and then residential solar. To be clear, in order to be a successful & sustainable business, these assets are not necessary for TerraForm Power. What they do, however, is rapidly grow the distribution paid to Daddy, SunEdison. Currently, SUNE is receiving distributions from TERP, and GLBL will follow [in a time period I don’t recall but don’t care to look up because it won’t matter anyway. It’s in the GLBL IPO filing if you really must know.].

What’s my point? How about I take some time to put all of the pieces together in what I believe to be the correct order. This is a very well-organized game of chess.

My thesis:

SunEdison planned to go bankrupt as soon as TerraForm Power went public.

When SunEdison began splitting itself up into multiple public companies in what could be one of the most ingenious strategies the business world may have ever seen, if they can get away with it. SUNE builds and/or constructs projects and after a period of time, drops them down into a subsidiary, whether it be TERP or GLBL, who retain call rights on all of the projects anyway.

SunEdison has been forever unwavering on their plans to take over Vivint Solar. It should also be noted that SUNE is the company issuing bonds to VSLR shareholders and not TERP. It should also be pointed out that the filings for the deal actually requires VSLR to pay SUNE a breakup fee, when normally the acquirer would be the one to pay any termination fees. SUNE could walk away from the VSLR deal right now with a profit, but they don’t want to even though it caused their equity to get entirely demolished. Suspicious?

If SUNE can stay alive long enough to finish their deal financing with Invenergy and VSLR, I believe it will fold very shortly after in 2016. If TERP acquires these assets, they will become a growing cash generating machine for the next 15–20 years with not NEARLY as much debt as SUNE has.

After opining on the company’s debt structure, I have come to the conclusion that SunEdison’s pure mission was to raid the debt and capital markets in order to create the strongest renewable energy utility possible as quickly as the market would allow. That time has seemingly run out.

After the Invenergy and VSLR deals close, why wouldn’t SUNE close their doors and file for bankruptcy? I’m no legal expert, but presumably TERP and GLBL will be able to immediately acquire all future drop-down assets from SUNE with no strings attached. Finally, a “new company”, or SunEdison 2.0, could rise from the ashes debt-free and begin collecting massive amounts of cash distributions from the TerraForm sisters. Not to mention this company isn’t exactly as transparent as investors would like with their “private warehouse” subsidiaries that are also generating “X” amount of cash flow in secrecy. If a “SunEdison 2” comes out and begins receiving payments from TERP and GLBL, it would be simply brilliant. SUNE CEO Ahmad Chatilla will most likely be seen as a hero of the green energy revolution if this plays out for rapidly expanding growth of the industry at the expense of the financing system. Maybe he wants to become the Jesus Christ of clean energy and die for the sins of fossil fuel? No clue.

I have no idea if SunEdison can get away with this strategy, but I do believe they obviously have the management capability to take an operation with this strategy this far into the game. I wouldn’t be surprised if this works out in their favor. They, like Valeant, have simply taken advantage of the system provided to them. However, unlike Valeant, SUNE’s management put together a clear exit strategy.

I want to make this clear before I break into another section: I am not a short. It is actually against my investing philosophy to short. That being said, this is obviously a short/bear thesis on SUNE. Like Valeant, I’m advising investors stay away from SUNE as the story has just become too hard and it has no longer become an investment, but a gamble.

What do we do with the now-public daughter companies? Well, the market hates them, that’s for sure. TERP has traded nearly hand-in-hand with SUNE to the downside. Here’s some more disclosure: I am long TERP and continue to be bullish on the name. I don’t want to go into a full-out research piece on the company, but the fact that the companies trade together should be taken advantage of.

As mentioned earlier, if the parent dies, TERP will be in even better shape than before. This appears to me to be the driving reasoning behind SUNE’s bankruptcy strategy. Assuming it acquires SUNE’s completed projects for free all at once, it will have more assets, stronger cash flow, bigger distribution, and no payments to make to SUNE unless it comes back after bankruptcy. Reasonable debt levels with an enhanced ability to pay it off in a SunEdison-ridden world. Interestingly enough, drop-downs from SUNE are becoming less relevant and during their previous quarter it was mentioned less would be dropped down due to lack of market appreciation. As it stands right now, without SUNE, TERP can continue to pay its distribution and pay down debt in a relatively short timeframe (3–5 years is my modest estimation). TERP has sufficient cash flow for the next 10 years at minimum, using their own data from this quarter’s presentation. It is becoming more apparent that SUNE is becoming the leech to TERP, rather than a formerly balanced relationship. TERP reported separately from SUNE this quarter, and the tone and reaction showed that TERP is a very strong renewable utility. Honestly, a larger utility might make a mistake in not snatching it up after SunEdison goes bankrupt, as I assume it will.

I think that about wraps it up. SunEdison is one of my conviction avoid stocks. I’m not saying to short it, I’m saying it is too hard to own. If I’m wrong, oh well. I don’t think I’m wrong, though. TerraForm Power continues to be my solar holding of choice, after the rapid expansion under debt primarily held by SUNE. I believe the market will realize this eventually and see the opportunity TERP provides as a standalone company.

To the SunEdison management: Bravo.

-CaeX, 11/11/2015

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